FHA reserves fall below 2% minimum, auditor says

WASHINGTON (MarketWatch) -- A large increase in foreclosures has pushed the reserve fund at the Federal Housing Administration to a record-low level, according to an independent review of the federal agency's books released Thursday.

The FHA's reserves dropped to 0.53% of its total insured mortgages, less than the 2% required by law. The reserves measure how much capital the FHA has beyond the funds it has put aside for expected losses over the next 30 years.

As of Sept. 30, the FHA had $31.5 billion in total reserves, representing 4.5% of its insurance in force. Read the full FHA report.

Under most economic scenarios, the reserve fund would remain positive, the independent actuarial review said. The baseline scenario assumes that home prices will fall another 6.5%, leading to a significant increase in foreclosures.

The FHA has become a major factor in the housing industry, stepping in to guarantee about a fourth of all mortgages sold in the past year. As of the second quarter, about 50% of all first-time buyers had a mortgage insured by FHA.

The FHA is funded by premiums paid by borrowers. No taxpayer funds are spent, and the FHA expects that it will make it through this crisis without asking for a bailout from Congress.

Foreclosure rates for FHA loans have risen, but are not as high as private-sector subprime mortgages. According to the latest data, about 26% of subprime loans were seriously delinquent, compared to about 8% for FHA-guaranteed loans.

In response to the deteriorating position, the FHA has stopped guaranteeing loans in which the seller provided the funds for the downpayment. These are among the risky mortgages. The FHA also named Robert Ryan as its first chief risk officer.

"There are real risks to the FHA and we are aggressively addressing those real risks with real reforms," FHA Commissioner David Stevens said. The agency has increased its credit standards and has suspended lenders who violated FHA requirements.

Recent loans are outperforming those insured in 2005 through 2007, Stevens said. The average credit score for FHA borrowers has risen to 693 from 633 two years ago.

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